FINANCE 634 EXAM 1
Fall 1999
Part 1
1. If you invest $5000 now in an investment that earns 8.75% per year, how much will the
investment be worth in 30 years?
Answer: __________________ [5]
2. If you invest $5000 now and $7500 at the end of each year for 15 years at an annual rate of 9.5%,
what will be the value of the investment at the end of 15 years?
Answer: __________________ [5]
3. Suppose you pay $2,500 for an investment that promises to pay you $500 per year for 9 years and
then pay you $1,000 in the 10th year. What average annual rate of interest does this investment
pay?
Answer: __________________ [5]
4. Suppose you pay $2,750 for an investment that promises to pay you $500 per year for 9 years and
then pay you $1000 in the 10th year. What is the stated (nominal) average annual rate of interest
on this investment if the account in which it is invested uses monthly compounding? Your
answer must be accurate to two decimal places: xx.xx% for example.
Answer: __________________ [5]
5. How long will it take to pay off a $10,000 loan with $500 quarterly payments if the loan carries a
9.25% effective annual rate of interest (APY)? Your last payment will be less than $500. Also
give the amount of this final payment.
Answer: Number of payments including final fractional payment __________________ [3]
Dollar amount of final fractional payment: ____________________ [2]
6. What amount would you need to deposit today in an account pays $10.25% per year in order to
provide an endowment to The Ole Miss Business School that will begin paying an annual
payment of $25,000 to the School beginning 30 years from now and continuing every year after
that?
Answer: __________________ [5]
7. Suppose you deposit $5,000 per year, beginning today and then annually for 15 more years, in an
account that pays 13.5% per year on average over the life of the investment. Five years after the
last payment into the account, you want to begin withdrawing as much as you can per year for 10
years in equal annual amounts to help supplement your other retirement income. If the 13.5%
interest rate holds throughout all of this investment's life, what is the amount of one of the 10
annual withdrawals?
Answer: __________________ [5]
8. Consider the following loan conditions:
Amount borrowed: $250,000
Time 10 years
Interest Rate 10.5% stated (nominal) annual rate
Payment Frequency Monthly
Balloon Payment $150,000
Answer the following questions:
a. What is the monthly payment on the loan?
Answer: __________________ [10]
b. What is effective annual interest rate on this loan?
Answer: __________________ [5]
c. What is the total dollar amount of interest you will pay on this loan if you carry it throughout the
entire 10-year term?
Answer: __________________ [5]
d. Suppose you pay off the loan immediately following the 40th payment. What is total dollar
amount of interest you will pay on the loan under these conditions?
Answer: __________________ [5]
e. Suppose the lending institution runs a special promotional deal such that every 12th payment is
reduced by $500. What is the effective annual rate on this promotional loan? Be precise to 2
decimal places: xx.xx% for example.
Answer: ____________________________ [5]
9. Consider the following loan: Stated Annual Rate 11.0%
Payment Frequency Monthly
Balloon Payment $5,000
Loan Term 5 years
For the 40th payment on this loan, the dollar amount of interest from the payment is $57.21. What was
the original amount of the loan?
[5] Answer: ______________________
10. Consider the following annual cash payments:
| TIME |
CASH FLOW |
| 1 |
0 |
| 2 |
0 |
| 3 |
0 |
| 4 |
0 |
| 5 |
0 |
| 6 |
1200 |
| 7 |
1200 |
| 8 |
1200 |
| 9 |
1200 |
| 10 |
500 |
| 11 |
? |
| 12 |
? |
| 13 |
? |
| 14 |
? |
| 15 |
2000 |
| 16 |
2000 |
| 17 |
4000 |
The missing cash flows (?s) are all equal amounts. Using a 10% discount rate, the TOTAL present value
of all of the cash flows is $3,000. Find the missing cash flows.
[10] Answer:______________
11. You deposit $2000 now and $7500 at the end of each quarter for 15 years (60 $7500 deposits) in
an account that has a stated annual rate of 9.5% with interest compounded continuously. How
much will be in the account immediately following the final deposit? (Assume that every month
has 30 days and every quarter has 3 months and 90 days.)
[5] Answer: $ _____________
12. You deposit $2500 now and make equal monthly deposits for 5 years (60 monthly deposits) in an
account that has a 10.0% stated annual rate with interest compounded quarterly. If the account
has a total of $82,000 in it immediately following the final deposit, what was the dollar amount
of your monthly payment? (Assume that every month has 30 days and every quarter has 3
months and 90 days.)
[5] Answer: $ _____________
Extra Credit: 10 Points (Partial credit may be awarded if you show you work neatly and have made
substantial progress toward the correct solution.)
Consider the following car loans:
Loan A: 9.5% annual rate on a 60-month loan with no down payment and $1500 cash
rebate. If you take this loan you do not intend to use the rebate as a down
payment.
Loan B: 2.4% annual rate on a 48-month loan with a $2000 down payment and no cash
rebate.
You will be purchasing a car that required $24,000 in financing prior to any down payments. You plan
to keep the car for 36 months and then sell it, at which time you will also pay off the loan.
What personal reinvestment rate will make you indifferent between Loan A and Loan B? Be accurate to
two decimal places: xx.xx% for example.
Answer: _________________________
Answers:
1. $61,922.432.
$248,558.34
3. 16.30%
4. 13.12%
5. 26.8 b. $400
6. $14,395.83
7. $76,081.33
8. $2,661.85, 11.02%, $219,442,
$83,872.78, you think about this one
9. $8,000.00
10. - $1031.05
11. $993,738.89
12. $1,008.21
EC 29.34%